Introduction
The Goods and Services Tax (GST), introduced in India in 2017, was one of the most significant indirect tax reforms in the country’s history. It aimed to replace the complex web of state and central taxes with a unified system, ensuring “One Nation, One Tax.” However, over the years, issues such as multiple tax slabs, compliance burdens, and mismatches in revenue collection versus consumption patterns created a need for reforms.
To address these challenges, the government initiated GST 2.0 — an overhaul of the existing tax structure. Unlike the first version, which focused on integration, GST 2.0 is about rationalization, simplification, and aligning taxes with consumer behaviour and inflation management.
This reform has directly influenced consumers across income groups (premium vs budget buyers), industries such as fashion and automobiles, and the overall economy through its effect on consumption and revenue collection.
1. Changes in the Tax Structure Under GST 2.0
GST 2.0 introduced several key modifications to rationalize tax slabs and correct anomalies.
1.1 Rationalization of Slabs
- Earlier GST had 5 slabs (0%, 5%, 12%, 18%, and 28%).
- GST 2.0 aims to reduce the number of slabs to 3–4, simplifying compliance and removing distortions.
- For instance, essential goods like food grains remain at 0–5%, while luxury or “sin goods” like high-end cars and tobacco remain at 28% with cess.
1.2 Wedding-Related Expenditures
- Weddings are a major driver of India’s consumption economy, covering clothing, jewellery, catering, event management, and hospitality.
- GST 2.0 raised taxes on luxury wedding services and premium venues to ensure higher revenue from affluent households.
- However, budget segments (like small catering units or regional wedding halls) received tax relief to support middle-class families.
1.3 Clothing and Fashion Sector
- GST 1.0 taxed garments below ₹1,000 at 5% and above ₹1,000 at 12%.
- Under GST 2.0, the threshold has been revised, and mid-segment clothing often attracts a uniform slab (8–10%), while luxury fashion brands face higher rates (18%).
- This change ensures that premium buyers contribute more, while budget clothing becomes more affordable.
1.4 Automobiles
- Automobiles were earlier in the 28% + cess category, which inflated prices.
- GST 2.0 introduced tiered taxation:
- Budget cars and electric vehicles → lower rates (12–18%).
- Luxury cars and SUVs → remain at the higher bracket (28% + cess).
- This incentivizes sustainable mobility while ensuring luxury consumption continues to generate strong revenue.
2. Impact on Consumers
2.1 Premium Consumers
- Luxury weddings, designer clothes, high-end cars are now costlier due to higher GST rates.
- Premium consumers face higher tax burdens, aligning with the principle of progressive taxation.
- However, their demand is relatively inelastic (less sensitive to price changes), so consumption continues but with increased contribution to government revenue.
2.2 Budget and Middle-Class Consumers
- Reduced rates on budget clothing, small-scale catering, economy cars, and household goods make essentials more affordable.
- This boosts disposable income and encourages wider participation in consumption.
- For instance, a middle-class family planning a wedding now pays less GST on regional catering or local garments compared to premium banquet halls and designer wear.
2.3 Shifts in Consumer Behaviour
- Rising costs in premium segments may encourage some consumers to shift towards mid-range alternatives.
- Budget buyers benefit from greater access to affordable clothing, smaller cars, and low-cost services.
- Over time, GST 2.0 may narrow consumption gaps between budget and premium groups.
3. Effect on Industries
3.1 Fashion and Apparel Industry
- Premium brands are taxed more, leading to higher final prices.
- Domestic budget clothing manufacturers benefit, as GST 2.0 makes them more competitive.
- This reform could boost demand in the domestic textile sector while making high-end fashion more exclusive.
3.2 Automobile Sector
- By reducing GST on electric and budget cars, GST 2.0 supports green mobility and makes personal vehicles accessible to a wider population.
- Luxury carmakers may face slower sales growth but remain strong due to niche demand.
- Overall, the sector experiences a redistribution of demand rather than a decline.
3.3 Wedding and Event Industry
- Luxury weddings face higher taxation, making them costlier.
- Small-scale vendors (photographers, local caterers, regional decorators) benefit from reduced GST burdens.
- The industry could witness a shift from lavish urban weddings to more sustainable, mid-budget celebrations.
3.4 Hospitality and Services
- Premium hotels and banquet halls see higher taxes, discouraging extravagant spending.
- Budget hotels and local service providers benefit, gaining more market share.
4. Revenue vs Consumption Dynamics
4.1 Government Revenue
- By taxing inelastic luxury demand at higher rates, GST 2.0 ensures a stable revenue stream.
- At the same time, reducing taxes on essentials encourages higher volumes of consumption, broadening the tax base.
4.2 Consumption Patterns
- Premium consumption remains steady but costlier.
- Budget consumption expands due to affordability, increasing market depth.
- The government collects more balanced revenue without overburdening the middle class.
4.3 Inflation Control
- By lowering taxes on essentials and green technology, GST 2.0 helps curb inflationary pressures.
- Higher taxes on luxury goods do not impact headline inflation significantly since they represent a smaller share of household spending.
5. Long-Term Implications
- Social Equity: Progressive taxation ensures wealthier sections contribute more, while essentials remain affordable.
- Industry Growth: Budget industries (domestic clothing, EVs, local services) grow stronger.
- Sustainability: Encouraging eco-friendly vehicles and mid-budget weddings supports sustainable development.
- Formalization of Economy: Small vendors benefiting from GST relief are more likely to register under GST, reducing the informal sector.
- Balanced Inflation: The dual approach of taxing luxury and easing essentials prevents inflation from spiraling.
Conclusion
GST 2.0 is not just a tax reform but a social and economic balancing tool. By restructuring tax slabs for weddings, clothes, automobiles, and other services, it has created a framework where premium consumers pay more while budget consumers enjoy relief.
Industries like fashion and automobiles are witnessing redistribution of demand, while the government secures stable revenue without stifling growth. The emphasis on sustainability and affordability indicates that GST 2.0 is designed not only to raise revenue but also to shape consumer behaviour, control inflation, and promote equitable growth.
In the long run, GST 2.0 could emerge as a cornerstone of India’s fiscal policy, blending taxation with behavioural economics to achieve inclusive and sustainable development.
